Saturday, September 26, 2015

Compete With Yourself

Our daughter worked from our kitchen table this past week because the Pope was visiting Philly and her firm advised her to get out of town. I worked from home one day, so we got a chance to go up to the local college, workout, and beat back the age monster together (see picture).

She was a college athlete (softball). And she said it was more difficult to workout as an adult because there were no goals and you didn't get the quick gratification of seeing success on the field. Instead, she said, she found success competing with herself. Doing more crunches than her last workout, putting an extra 10 pounds into her lifts. 

This got me thinking about a speech I heard by George Brett, the legendary third baseman for the Kansas City Royals. George said he had a problem with today's baseball player: lack of hustle. He told the story of how he would compete with himself when he grounded out, seeing how far he got down the line before the ball hit the first baseman's mitt. Same with fly balls. How far could he get to second before the outfielder made the catch. Imagine that with today's player who is more likely focused on his stats compared to others.

But wait! Isn't that exactly what we do in banking?

The most ubiquitous culprit is the Uniform Bank Performance Report (UPBR). Not sure if there is an equivalent in the credit union world. If so, let me know. But every quarter senior executives pour over the UBPR to see how they did against similar financial institutions. How similar? Asset size. So if an ethnic, SBA-focused financial institution is the same size as a rural, ag-focused bank. Boom! On the same UBPR.

Differences in business models aside, are we satisfied comparing ourselves to other financial institutions? Five years ago I wrote on this topic in a post titled The Folly of Peer Groups.  I suggested comparing yourself to institutions that are like you, and institutions that you aspire to be like. But today I'm suggesting going further.

Compete with yourself. Continuous improvement. Asking yourself each morning how to be better at the end of the day than you are at the beginning of the day. That if you fail at something, don't count it as failure but as a lesson learned. And share your lesson learned with colleagues so they can benefit from your experience. 

You lead by example. It must have been difficult for a Kansas City Royal to trot to first base on a ground out when the star player hustled so he can be three steps away from the bag when thrown out instead of four. That type of leadership impacts a culture that doesn't show up on a UPBR. But it will.

I don't think the greatest companies or the greatest leaders run peer groups to make sure they are better than average. Side note: Wouldn't that make a great epithet on your tombstone? "Here lies Jeff. He was better than average." Not really.

When I coached lacrosse, I had pre-season meetings with parents. In those talks, I set parent expectations. One was that I don't compare players to the player next to them. Parents fall into traps thinking that as long as their child played better than the one next to them, their spot was assured. But what if the less talented girl hit 95% of her potential? Being one of the best on the team and only hitting 60% of your potential is not a win.

And we should stop treating it like one.

~ Jeff

Sunday, September 13, 2015

My Fantasy Banking Team

Last weekend, a bunch of friends got together for our annual Fantasy Football (FFL) draft. My first pick: Tom Brady (8th overall). I'm feeling pretty good about it since he threw four touchdown passes in week one.

But it got me thinking about who would be my picks if I were assembling a fantasy banking team. So I thought I would give it a shot.

First, I needed to decide positions needed. The owner... Chairman. The quarterback... CEO. The running back... Chief Retail Officer. The wide receiver... Chief Loan Officer. The kicker... Chief Information Officer. And defense/special teams... CFO.

The Owner/Chairman

Criteria: I looked to Bank Director Magazine's annual scorecard for my pick. I used the $1-$5 billion in assets category, and limited my pick to a non-executive chairman, because an executive chairman can influence excellence from the CEO role regardless of holding the Chairman position. No, I wanted a top notch Chairman/Owner of my team that worked his/her magic with the gavel alone.

Selection: Chan Martin, CommunityOne Bancorp (NASDAQ: COB).

Chan was a former Bank of America senior executive, serving as the Corporate Treasurer, Enterprise Risk, and various other functions during his career. He retired in 2008 from BofA, but they thought so much of him they brought him back to assist with the Merrill Lynch integration.

He joined COB's board in 2009 after its $310 million recapitalization which was needed from a disastrous slew of losses incurred starting in 2008 as a result of awful credit decisions, leading to a 21% NPA/Asset ratio peak in 2010. Chan came as part of the recap, and rose to Chairman in 2014. Since his joining the Board, the bank has stabilized, returned to profitability, recaptured it's deferred tax asset, and NPAs/Assets have declined to less than 3%. Yeah, Chan can own my team.

The Quarterback/CEO

Criteria: I am an aficionado of long-term total return. So when selecting my quarterback, I want the guy/girl that has the best three-year total return. I had to eliminate penny stocks, low-trading stocks, and merger targets.

Selection: Greg Garrabrants, BofI Holding, Inc, (NASDAQ: BOFI)

Greg has been in charge of the Bank since 2007. Prior to BofI, he was an investment banker, management consultant, and attorney to the banking industry. Imagine that. What has he delivered to his team? A 367% three-year total return to shareholders, when the industry averaged 60%, according to the SNL Bank & Thrift Index. He can QB my team.

The Running Back/Chief Retail Officer

Criteria: I sifted through banks with the best cost of funds and cost of interest bearing liabilities. Building a low-cost core deposit base is arguably the most difficult task in banking, and it creates significant value to the publicly traded bank because it is difficult to replicate.

Selection: Mitch Englert, EVP of Community Banking, Capital City Bank Group, Inc. (NASDAQ: CCBG)

When you dig deep into the organizational structure beyond the folks you see at investor presentations, you find people like Mitch, who started his career at Capital City in Tallahassee, FL as a part-time teller. What has he accomplished? Thirty-four percent of Capital City's deposits are non-interest bearing. A mere 9% are time deposits. Cost of funds: 9 basis points. Let that sink in a bit. I'll give Mitch the ball.

The Wide Receiver/Chief Lending Officer

Criteria: I searched for banks with the best yield on loans coupled with excellent asset quality as represented by NPAs/Assets. I focused on traditional community banks and did not consider high yield type banks such as credit card banks. But I also wanted to find a community bank that focused on lending to the businesses of today, and not solely the owners of the buildings these businesses reside. They "received" their funds, and lent it into their communities.

Selection: Monty Rogers, EVP and Chief Lending Officer, Security Bank

Is there any doubt that the leader of my receiving corp would be a Texan? Security Bank in Midland, Texas lends to business, period. Their loan portfolio is 47% C&I loans... i.e. true business loans. None of this "we support businesses so long as they have real estate collateral". Sure, Monty does real estate lending too, representing 50% of the loan portfolio. But last week I was at a bank whose loan portfolio had 94% real estate loans. What has Monty delivered to Security Bank? A 6.94% yield on loans combined with a 31 basis points NPA/Asset ratio. Go ahead Monty, spike the ball!

The Kicker/Chief Information Officer

Criteria: If you believe, as I do, that more people interact with your Bank via technology channels than all other channels combined, then you need a solid CIO on your fantasy team. There are no financial metrics to rank your CIO's for the fantasy draft. 

Selection: Robert Landstein, EVP and CIO and Chris Tremont (pictured), EVP of Virtual Banking, Radius Bank

Ok, I hedged. Call this one my first add/drop of the year. In my league, that cost 10 bucks. But Radius Bank in Massachusetts, the former First Trade Union Bank, is forming the type of FinTech partnerships necessary to drive community bank relevance into the future. Read more about their initiative in an American Banker Bank Technology News article here. Welcome to the team Bob and Chris!

Defense/Special Teams/CFO

Criteria: I want a strong balance sheet manager in the CFO role. The rumblings of Fed Funds rate hikes are strong, and a rate hike this year, perhaps this month, seems likely. So I wanted a solid one-year GAP, so the bank and therefore my team doesn't get pummeled in a rising rate environment. I also wanted a solid liquidity ratio, so the bank doesn't have to reprice rapidly to maintain liquidity. Lastly, if they can do that with an enviable yield on securities, then you're on the squad!

Selection: Greg Hollier, CFO, Gulf Coast Bank and Trust Company

My "Girl with the Dragon Tattoo" investigation could not dig up much on Greg from a personal standpoint. But let me tell you this... the Bank has a 1.98% ROA, and a 22% ROE. Its liquidity ratio is 28% and only 3% of its securities are pledged. Cumulative one year repricing GAP/Assets= (5.56%). Oh, and the yield on securities is 3.22%. I think he is doing work managing the $1.3 billion balance sheet. You?

There's my team. I think it's a winner, not just for this season, but to lead our industry into the future.

Who is on your banker fantasy team?

~ Jeff

Monday, September 07, 2015

A Labor Day Analysis of American Banker's Best Banks To Work For

American Banker recently published their annual Top 50 Banks to Work For compendium. I am proud to say that a few of the winners are clients. Why the pride? My firm does not specialize in happiness. We specialize in strategy and profitability. So why would I care if clients were lauded for bringing job satisfaction to their employees?

It's all about perspective. During strategy sessions I am sometimes dismayed at some banks that make shareholder returns the fulcrum of their strategy. Shouldn't the very existence of our bank be nobler? We are all working our way through life. And most of us want our neighbors, coworkers, family and friends that navigate life beside us to do so with peace and happiness. We have far more customers than shareholders. And how we run our bank has a much more direct impact on employees' lives than shareholders' lives.

On this Labor Day, I put to you that a strategy focused on customers and employees satisfaction is a better undertaking than solely focusing on shareholders. Shareholder returns is the scorecard that shows us how we are doing in serving customers and employees, and whether we deserve to remain independent to execute our strategy.

I often invoke the term "right to remain independent". Put simply, a bank should deliver financial performance and total return equal to or better than would-be acquirers, so it is presumably better for shareholders to hold your bank's stock. 

The banks in American Banker's list ranged in asset size from $220 million to $19 billion and the number of full-time equivalent employees ranged from 51 to over 2,200. To say the least, the banks were wide and varied in size, charter, strategy, and geography. So comparing them to an index peer group is difficult. 

But I did it anyway. Below are some financial condition and performance metrics of the Top 50 compared to SNL's Bank & Thrift index banks.
It appears that a focus on employee satisfaction has not adversely impacted financial performance. In fact, we have found that there is generally a positive correlation between bank size and financial performance, and the SNL Bank & Thrift index banks are undoubtedly bigger than the average sized bank in the Top 50, which was $2.2 billion in assets. The SNL Index includes all major exchange (NYSE, NYSE MKT, NASDAQ) banks and thrifts. No limited trading markets or private companies, where smaller banks tend to be. So the relatively smaller Top 50 delivered very similar financial performance than the larger index banks.

The American Banker list highlighted what was perceived as the major benefits of working for the Top 50. I carefully sifted through their list to identify common themes that were valued by employees. The results of my analysis are below.

I was not surprised by some, such as free employee meals. Feed someone to make them happy. Makes sense. It did surprise me that gym and/or health initiatives topped the list. Perhaps, with continued digitization of bank processes and transactions, banks need less real estate than they have and it makes sense to put that space to good use for a healthy lifestyle employee perk. 

Some of the most mentioned benefits cost little to nothing, such as executives communicating with employees and vice versa, and flexible scheduling. Others do cost money, such as generous benefits, incentive compensation, and career development. But these hard costs did not result in lower financial performance, according to the first table. Perhaps one can conclude that a great place to work attracts more capable employees that can more effectively and efficiently serve customers even though the cost structure of the bank may be higher.

Would you rather build a bank with a slightly higher cost structure and very satisfied employees that delivers a similar return to banks with leaner cost structures and a greater proportion of curmudgeons? 

What do you think?

~ Jeff

Link to American Banker Top 50 Banks to Work For